Solvents Inc., an industrial company in the USA, decides to issue 0.5 million 20-year bonds with a face value of $1000 and semi-annual coupon payments. The effective annual rate or yield on other commercial and industrial bonds of similar risk is 7.25%, so the company decides to offer 8% annual coupon to attract investors. What capital will Solvents Inc raise from the issue of the bonds assuming that an investment bank has fully underwritten their offer for a fee of 2% of face value plus $1 Million in legal costs. Show all workings.

(a)Imagine that immediately after issue, the general level of interest rates in the U.S. economy moves to such an extent that the value of the Solvents Inc bond shifts to exactly $1000. What would now be the new bond-equivalent yield (the one that will be advertised in the financial press as an annual rate and is sometimes called Quoted Interest Rate)?

(b)What would now be the new effective annual yield or rate (EAY or EAR)?